Foreign ER & Taxes

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Saver

Dryer sheet aficionado
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Feb 4, 2004
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I've tried researching this on the web but have not been very successful.  In a country such as France, which has a high tax scale, how would taxes work out for the early American retiree with income only from capital gains, dividends, and interest?

It is my understanding that there is no double taxation between the US and France, but lets say that an ER has $10K of retirement income and that 1) taxes would be 3K for a French retiree living in France and 2) federal taxes on the same amount of income for an American living in the US would be 2K.  In this scenario, how much in taxes would an American retiree living in France have to pay if they had $10K in income?  Does the person pay $3K ($2K to the US government and $1K to France or some other combination)?  Does a retiree always/usually pay the higher tax rate when the US has a double taxation agreement with another country (i.e. pay the US tax to the US and the difference to the foreign country)?

Thanks for any help, Saver
 
Dunno. I am casually investigating the idea of retiring in Canuckdia. I work in northern Alberta at the moment. I am sure the tax principles are similar. I will post if and when I find out more. I am paying two tax men to tell me how things work cross-border here.

Gypsy
 
Saver,

Generally speaking double taxation treaties prevent double tax payment and US citizens are paying their taxes in the US wherever they are (this is how the US enforce their power on other states). I see no reason you would pay anything to the French tax admin. We have a tax on wealth, which normally applies to all including foreign persons having invested more than 732k€ in France (e.g. nice house down on the riviera) with various brackets, the top bracket being 1,8% per year over 15M€ which has led many with that much to move to Belgium, Italy, etc. and relocate their money in a more favorable place (I have no knowledge of an exemption for US citizens on that).

Apart from that, would you make money renting a property you would have bought on the French soil, you have to check whether being a US citizen would also mean paying to the US (as long as generally speaking real estate is taxed where it is located). As far as capital gains are concerned, we have no difference between short and long term gains and taxes are acceptable, i.e. 16% + 10% of social contributions, overall approx 26%. But again you have no reason to pay that in France even though it might be less than what you'll pay to the IRS at the end of the day.

To say more would need to go into the details of your plans.

Patrice (from Nice in France)
 
Email the question to the IRS here :-
http://www.irs.gov/help/page/0,,id=120294,00.html

Double taxation under normal circumstances means you are required to pay tax in both countries, and claim back from one of them (often the country you're not resident in, but are a citizen of - definite PITA!).

If you're living overseas relative to the US, you'll get a credit from the IRS for taxes paid overseas, that will obviously reduce your tax bill for any income generated in the US itself

You can also go to the IRS website forms and publications area and download these :-
p901 - U.S. Tax Treaties.pdf
p54 - Tax Guide for U.S. Citizens and Resident Aliens Abroad.pdf
p519 - U.S. Tax Guide for Aliens.pdf
 
Thank-you all very much for the responses.

I won't write too much here because I need to follow up on the research suggestions you all made.

The work I did earlier today indicates that as US citizen living in France may in fact have to pay something to the French tax system. Also, I read that the wealth tax applies to all persons resident in France and to assets both in and outside of France (spooky to say the least ... that sounds so wrong :-]).

Please keep the ideas/knowledge coming. I'll send an update if and when I get information that is relevant.

Saver
 
I checked "p54 - Tax Guide for U.S. Citizens and Resident Aliens Abroad.pdf" (thanks retire@40)

The information does not apply to a specific country but it is very helpful. According to the text ... it is usually the case that the condition for potentially not having to pay foreign taxes (income & cap gains) is that one be a "U.S. resident."

My question: Can an American live overseas full-time for decades and remain a "US resident?"

Any help is appreciated.

Saver
 
Country specific info including France is contained in :-
p901 - U.S. Tax Treaties.pdf

Still suggest you email the IRS on the supplied link, (you can use a dummy or anonymous email account if you wish). Assuming you're a US Citizen then yes you can remain abroad forever and still remain a Citizen. Not the case if you're a Permanent resident.
 
You are considered a French resident if you stay more than 183 days in France, or send your children to French public schools or have the center of your economic interest in France.

If none of these apply, whatever your citizenship (French or not), you're not supposed to pay taxes to the French admin, unless you own rental propoerties (NNN type for example) generating income on the French soil for which taxes are always paid in the country where the real estate property generate income.

If you're considered a French resident with a foreign citizenship, then - if a double taxation treaty has been signed - its objective is to avoid double payment whatever the procedure is (e.g. eventually being refunded as ER40 suggests). You'll pay at the end *once* but to whom is the question and depends of the double treaty itself . My understanding so far was - but I'm not a US citizen - that the IRS has imposed on most tax admin in the world that taxes on US citizens are still due to the IRS wherever this US citizen lives (to be checked on a case by case for each treaty).

Back on wealth tax, it applies on all holdings & properties in and out of France if you are a French resident (in fiscal terms). If you're not (none of the three aforementioned conditions apply) you'll still have to pay on assets held in France (general case, not knowing whether US citizens have a special exemption in the double tax. treaty).

As far as wealth tax is concerned, here are the brackets (taken out of my spreadsheet):
1er tranche n'excédant pas 732 240 euros => 0%
2eme tranche entre 732 240 et 1 179 720 euros => 0,55%
3eme tranche entre 1 179 720 et 2 339 100 euros => 0,75%
4eme tranche entre 2 339 100 € et 3 661 200 € => 1%
5eme tranche entre 3 661 200 € et 7 017 300 € => 1,3%
6eme tranche entre 7 017 300 € et 15 255 000 € => 1,65%
7eme tranche supérieure à 15 255 000 € => 1,8%

It does not hurt too much under say 1,2M€ (can be viewed as a super tax on real estate) but then is considered as a problem by most investors.

Hope it helps,

Patrice.
 
Welcome to the board, Patrice.

My French isn't that bad but I can't translate "gnoti seauton". Is it French? What does it mean?

Saver, you're doing enough research to write an ex-pat's book on selecting a good retirement site. Keep us posted!
 
Thanks for your welcome Nords. I'm getting a bit away from the SWR discussion and hocomania :))
gnoti seauton should be written with greek letters (which I miss with my keyboard :) and means "know yourself" as Plato put it.
Not sure to know myself anyway....
But I know what enough is enough means: FIRE !
Cheers.
 
poyet said:
You are considered a French resident if you stay more than 183 days in France, or send your children to French public schools or have the center of your economic interest in France.
Click to expand...

Dont you also have to be able to surrender in less than 1.2 seconds?

Sorry... :(
 
Well, th
to be honest with you I did not get your point, though I guess you pointed to the excessive rigor of my definition.

To add a bit, so that people will not laugh too much with that, the French IRS also monitors credit cards, portable telephones and even garbagges at the doors of the villas to check whether people actually stay more than 183 days in France. Because when they do, they cannot claim exemption on wealth tax for assets outside of France nor benefit from more favorable tax regimes on say (financial) capital gains for example, as is the case in Belgium.

Food for thought.
 
Thanks again to you all.

Aloha Nords! – I hope all is well.
Poyet – Thanks for all of the effort you’ve put forth … very helpful.  May I ask what a 10% consumption tax is for?
ER@40 – I may e-mail the IRS, but I want to try some live contacts first. Thanks

I spoke with someone at the French embassy in D.C.  She had to go through some papers to find the answer, but in the end here is what she told me:  One would have to pay the higher French tax rate in the example that I gave in my original post.  You end up paying the higher rate, with the payment split between the US and France.  Also, according to her there is no avoiding the wealth tax.

I hope to double check with the American Embassy in France next week. 

This exercise has made me think:  I always hear of great places to retire overseas where one of the main criteria for being ‘great’ has to do with the cost of living.  I could be wrong, but I don’t remember seeing talk of low taxes on capital gains, interest, and dividends when it comes to choosing an international retirement spot.  Has anyone ever seen such a list or know of such countries?

Saver
 
Saver said:
could be wrong, but I don’t remember seeing talk of low taxes on capital gains, interest, and dividends when it comes to choosing an international retirement spot. Has anyone ever seen such a list or know of such countries?

Saver
Click to expand...

Yes, there are quite a few countries that exempt you from paying taxes on foreign income including interest etc. or have a very low rate. However, all these countries are developing countries. They are often the same countries that have retiree program that is aimed at foreigners with hard cash. I am not sure about which places offer it now, but I would check out the rules in Costa Rica, Panama and Belize to name a few.

Otherwise you can stay in France for less than 183 days a year. Btw, non-resident usually means more than physical presence. If you buy a house and have other significant ties to your community, you may still be considered a resident if you spend considerably time there.

This is one of the reasons that some people become a PT (perpetual traveler). However, living out of a suitcase and remaining on the move to avoid residency is not for everybody.

Vicky
 
Thank-you Vicky,

So far I’ve been setting my sights on developed counties, but that may not be a good idea.

For those interested, the following link provides the most comprehensive and up-to-date information that I’ve found so far on French taxation: http://www.frenchentree.com/france-tax-advice/DisplayArticle.asp?ID=2254
Warning: the information is quite graphic and could offend some ER types (i.e. they tax like it’s going out of style!). Regarding the various ways to be defined as a resident, please read the text at the top of the page.

A quick check on the web shows that Spain (another ER-site candidate) also has a wealth tax.

I was actually going to include a theory about the connection between the PT lifestyle and taxes in my previous post but decided against it. Glad to see that you brought it up. It seems that even PT’s need to be wary about how long they stay in a given location.

Saver
 
The PT lifestyle is certainly not for everybody - but does have its advantages.
It can as such be only 2 countries both having the 180 day rule - but personally I would not want to get too close to the 180 days so a third country (with a 2 month "vacation") probably works out better.

It is very true that taxes can make a huge difference to ones FIRE lifestyle.
My Scandinavien home country would take about 50% of div/interest/capital gains cutting an ok $1M 4% = $40k/year FIRE to a barebone(in home country) $20k/year. Auch!

Cheers!
 
Hi Saver,

I cannot get to what you refer with <<May I ask what a 10% consumption tax is for? >> We have a 10% (a bit more now) social contribution (it's just a tax !) but the government calls it social contribution as it sounds better ! 10% made of CDRS and CSG (one to repay the social debt, i.e. CRDS), the other (CSG) to keep digging the hole in the danaides barrel of the social wellfare ! This applies on nearly every income and cap gains. This is how you reach (for non-professionals) 26% on cap gains on financial markets (16% tax + 10% social contribs). Those 10% add on all other taxes, e.g. tax on income (salary), on real estate income, on cap gains, etc.

The link you gave provided a comprehensive and correct picture on French Taxation. They even updated their thresholds on wealth tax so that it would match the 2005 figures. Those I provided came from 2004 plus 1,7% (then IRS rounded up numbers as I noticed in the last printed material I received).

The only thing which they do not seem aware of, is that cap gains on real estate have been simplified and mapped to cap gains on fin markets. 26% max over the first five years, then 10% discount per year (e.g. after ten years 50% discount on 26% =>13% taxation) and after 15 years therefore you break free of tax.

Patrice.
 
LEX said:
Its amazing that Americans have the the IRS following them globally. Perhaps dual citizenship is not a bad idea from a tax planning/expat stand point.

Here is an interesting link on the subject.

http://www.escapeartist.com/efam5/expat_tax.html
Click to expand...

OK:

I have dual citizenship, (Triple in fact [3 legit passports]) because I have lived all over the place and applied for citizenship before I left each of my non birth countries.

We have no income other than interest income from fixed income investments. I paid taxes last year in the US and was quite happy to, even though I spent more than 10 months away. I did not stay in any other country more than 6 months either. Doesn't the problem only occur if you get income from other countries. Also if all your investments are in the USA, is it not easier to simply file taxes there. US taxes are pretty low compared to Europe and Canada. Unless you are living in Asia then I guess it is different. Being ER'd our combined income is less than $60k per year. We have some tax credits left over from our working years that will take about another 3 years to use up.

Thanks

SWT
 
SWT:

Good points.  My DW is also a three passport holder, including the US, and one that has no tax treaty with anyone, and even if they did they would most likely not honor it. 

I have thought about this scenario: what if one were wanting to invest in say, a Tax harbor like Switzerland, the Caymans or Malta, and wanted to live offshore on the proceeds from this investment and otherwise lived without any income in the US,  this might prevent US taxation, perhaps from a practical stand point, since even if there are tax treaties, the country where the investment was domiciled would act on the citizenship basis of the registered non-US account holder.  I suppose one would have to declare the income if one were to bring the income into the US. The US tax code is so complicated that I doubt even the IRS understands its nuances in this situation, though I expect when in doubt the IRS default position is that they have absolute impunity to tax everyone everywhere for everything.   
 
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